Reference no: EM132236053

What metrics would you use to measure if Coherent is successful in Japan?

based on your metrics, is Coherent successful in Japan now?

based on your metrics, where should Coherent be in 5 years?

how do you propose they get there?

Background

Coherent Inc. was founded in Palo Alto, California in 1966 by Jim Hobart, a University of Michigan physicist who found his way to California in search of research and innovation opportunities. Located in Stanford Research Park, Coherent Inc. quickly established itself as the leader in laser technology for industrial and scientific applications like cutting steel and etching silicon wafers to make semiconductors. In the early 1970’s, Tom Brunner, a Coherent product manager with an engineering degree, helped Dr. Hunter Little, an ophthalmologist at Stanford University, build a laser to treat the eyes of diabetic patients. Tom and Hunter believed that a green beam of light from an argon laser could be used to cauterize leaky blood vessels on the retina of diabetic patients. Simple physics teaches that when light energy encounters a substance it is either transmitted (passes through) reflected (bounces back), scattered (dispersed in a million directions) or absorbed. Argon laser beams are green. The fact that we can see them means the beam of light will transmit through the cornea, or clear window at the front of the eye. The back or our eye, the retina, is brownish-pink in color due to pigment and blood vessels, both of which absorb green light and convert it to heat energy. This allows doctors to send an argon Figure 1 - Jim Hobart

Prepared by Peter Falzon, University of Michigan, Ross School of Business EMBA-23

laser beam through the pupil in order to cauterize leaking blood vessels in the back of the eye.

In 1975, Coherent’s Argon Laser Photocoagulator was cleared by the FDA to treat diabetic eye disease inaugurating the medical laser industry, which today is a three-billion-dollar business spanning ophthalmology, dermatology, plastic surgery, urology, orthopedics, gynecology and more. In 1980, Coherent established a medical division and named Tom Brunner the President. The Argon Laser soon became the standard of care for treating diabetic eye disease. Within a few years three competitors emerged, one each in Germany, France and Japan. Coherent was clearly the market leader thanks to its strong brand. The French company, Biophysique Medical, had a very space-age design and its products are imported and sold in Japan by an upstart and aggressive new company in Tokyo. The German company, Karl Zeiss, has its own subsidiary in Japan and stressed German engineering. The Japanese company, Nidek, sold on price and reliability.

The Opportunity

Fast forward to 1991. Peter, a 1985 University of Michigan graduate with a dual degree in Economics and Japanese Studies, is working for Toyota in Japan and happens to sit next to Tom Brunner on a flight from Tokyo to San Francisco. Tom just spent a week in Japan where Coherent has gone from the market leader to 3rd place in just 3 years. Nidek has grown to be the market leader in Japan, Karl Zeiss has just entered the market, and Biophysique from France has passed Coherent to assume the #2 position. This despite Coherent’s strong brand, and the company’s recent investment in a manufacturing joint venture in Japan. Tom and Peter strike up a conversation. Tom notices Peter is fluent in Japanese and shares the story of Coherent’s experience in Japan. Peter is intrigued by the high-tech medical business and asks a lot of questions. By the end of the flight Peter offers to meet some of Tom’s customers and business partners in Japan and apply his language skills and cultural understanding to assess the situation on Tom’s behalf.

History

• In 1982, the exchange rate was 200 yen to the dollar and Matsumoto Medical, Coherent Medical’s distributor in Japan, imported lasers from Coherent Medical in California for $50,000 (10 million yen) and sold them to doctors and hospitals in Japan

Figure 2 - Tom Brunner

Prepared by Peter Falzon, University of Michigan, Ross School of Business EMBA-23

for 20 million yen making a 50% gross margin. Anything above 40% was considered great.   • In 1983, Nidek entered the market and began selling lasers for 15 million yen. • In 1984, Coherent set up a joint venture (JV) in Japan with Kowa, a multi-billion dollar pharmaceutical and optical instruments company, to manufacture medical lasers in Japan.   • Coherent sold the Coherent-Kowa JV “knock-down kits,” which included the argon laser tube and proprietary software and electronics, for $30K (6 million yen), the JV added 3 million yen of local content, (non-proprietary electronics, housings and casters) and 1 million yen of margin and sold the made-in-Japan Coherent branded lasers to Matsumoto Medical for 10 million yen. Current situation

• It’s now 1991 and the exchange rate is 100 yen to the dollar. • The JV has benefited from the appreciation of the yen, but has not passed on any of that benefit to Matsumoto Medical (MM). • MM is still pricing Coherent’s (Japan assembled) lasers at 20 million yen. MM is not attempting to compete with Nidek’s on price, or even respond to Nidek’s lower price and close some of the gap. • Coherent lasers are 25% of MM’s business. • MM’s supply agreement with all other companies are in U.S. dollars. • The JV is staffed by employees from Kowa. (In 1991, it was common in Japan for large companies to send their less-than-stellar performers to subsidiaries rather than let them go, as part of the lifetime employment system common in Japan.) • Kowa entered into the JV to help update the company’s image from low-tech to hightech.   • The revenue and profits of the JV are positive but insignificant in the overall scheme of Kowa’s business. • MM is trying to downplay to doctors in Japan the fact that Coherent’s lasers are made in Japan. MM’s business model is to import the best medical technologies from the U.S. and Europe to sell in Japan at a premium price. Japan’s elite doctors and university hospitals want original medical instruments, not copies. • Because laser photocoagulation is a new high-tech therapy, Japan’s Ministry of Health and Welfare has set a high reimbursement rate. Eye doctors performing laser photocoagulation are not particularly price sensitive. • Eye doctors in Japan are very status conscious and like to have the same medical instruments and provide the same level of service as the top teaching hospitals. • The Japanese doctors who are opinion leaders in the field recognize Coherent’s lasers as the gold standard but don’t know what to make of this JV in Japan. Some doctors

Prepared by Peter Falzon, University of Michigan, Ross School of Business EMBA-23 have requested MM provide them a California-made Coherent laser even if it comes at a higher price.

Financial information

• In 1990, Coherent Inc. in California sold 60 knockdown kits to the JV for $30,00 each for a total revenue of 1.8 million dollars. This represented about 4% of Coherent Medical’s total sales of 45 million dollars.

• In the early 1990s, the global market for medical technologies was distributed among developed countries as follows; 40% US, 25% Japan, 25% Western Europe, 10% Rest of World.